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Britons set to vote with their wallets against a Brexit

Britons will vote to remain in the European Union, as the economic consequences of leaving it would be severe, says Robeco Chief Economist Léon Cornelissen.

Léon

Cornelissen

Chief Economist

Speed read

UK referendum on 23 June to decide whether to stay in the EU

Brexit could cut as much as 8% from GDP, causing recession

Bremain is ‘best of both worlds’, though with less independence

Opinion polls and betting odds suggest victory for remaining

In a white paper exploring the likelihood of the so-called ‘Brexit’, Cornelissen predicts that trying to negotiate difficult and less valuable trade deals outside the Single Market would be unpalatable to the UK electorate. Some 44% of British exports go to the EU and millions of jobs depend on it.

He says the rationale for remaining within the 28-nation EU are largely economic, while the arguments for leaving it are more emotional: an attempt to regain an independence that many Britons feel has been eroded by the power of bureaucrats in Brussels. The in/out referendum of 46 million voters that will decide the UK’s fate takes place on 23 June 2016.

Opinion polls currently suggest a narrow victory for the ‘Bremain’ camp, with about 43% currently committed to remaining and 37% wanting to leave, with “don’t knows” of 20%. Historically, those undecided have tended to vote with the status quo. The bookmakers’ odds – which have frequently proved more reliable than opinion polls since it is real money and stake – suggest a much larger victory for Bremain, with 70% in favor and 30% against.

Size of majority is key

“It looks pretty much odds-on that the Brexit won’t happen, but much depends on the actual size of the majority,” says Cornelissen. “A large, decisive victory would probably bury the question for at least a generation, and allow investors and markets to move on. The volatility generated since the referendum was called in February has been significant, with the pound losing 12% against the euro, and UK bond spreads widening. So investors would certainly breathe a sigh of relief if the bookies are correct.”

“However, a small majority would make it likely that the Brexit question would be raised again not far in the future, and Brexit risks would continue to cause instability in financial markets. The problem of small majorities was evidenced in the 2014 poll for Scottish independence, in the so-called Scoxit, which resulted in 55% voting for Scotland to remain part of the UK and 45% for it to leave the Union. The slim size of the majority has led to the issue recurring, with calls for a new referendum following the landslide victory of the Scottish Nationalist Party in the general election of 2015 just eight months later.”

Rolling 6-poll average based on the question "Should the United Kingdom remain a member of the European Union or leave the European union? Sourche: Survation, ICM, ComRes, Ipsos MORI, YouGov, Panelbase, TNS, BMG Research, ORB, Opinium, J.P. Morgan

Fear factor has a big role

Cornelissen says there is definitely a fear factor against a Brexit, which would irrevocably change the UK, both economically and politically. “The Bremain camp has consistently warned that leaving would have major short-term and long-term economic costs, knocking as much as 8% from GDP within three years, according to the most pessimistic estimates,” he says.

“The OECD reckons with longer-term economic damage of between 2.7% and 7.7% knocked off GDP in the run-up to 2030 (with a baseline scenario of -5.1%). Lower trade openness, the reduced attractiveness of the UK for foreign direct investment, less domestic investment and fewer benefits from immigration would be the main drivers for these inevitable long-term costs, according to the OECD. So the British are looking at a massive recession outside the EU.”

‘The period of heightened uncertainty would be hugely damaging for investor confidence’

“The divorce period for leaving the EU is officially set at two years, but it is unlikely that this would be enough time for a comprehensive agreement – one with Canada has already taken seven years to negotiate and still isn’t ready yet. In any case, the period of heightened uncertainty would be hugely damaging for investor confidence and contribute to wider financial market volatility.”

Cornelissen says uncertainty around the Brexit debate is already hurting the UK economy. “Understandably, companies are choosing a ‘wait-and-see’ attitude in the run-up to the referendum and are postponing investment decisions for the time being,” he says. “As a consequence, UK growth is weakening, sterling is sliding, and the current account deficit is widening further.”

Political consequences also severe

Politically, there would be major upheaval, Cornelissen warns. “Prime Minister David Cameron, who has led the Bremain campaign, would almost certainly stand down, and the Conservatives would need to elect a new leader, who would probably be Boris Johnson, who backed the Brexit campaign,” he says.

“And Scotland wants to remain within the EU, so a Brexit could also cause a Scoxit, since the Scottish could claim they have been ejected against their wishes from the EU based on English votes. The same thing applies to pro-EU Wales and Northern Ireland. So it could lead to the break-up of the UK itself.”

‘Currently, the UK enjoys the best of both worlds with its membership of the EU’

If Britons do choose to Bremain as expected, Cornelissen predicts better times ahead for investors in UK assets. “Following a Bremain vote, a relief rally is likely, and more so if the size of the majority is sufficiently large enough to bury the question for at least a generation. Pent-up investment would be unleashed, paving the way for stronger GDP in the quarters to come.”

“Currently, the UK enjoys the best of both worlds with its membership of the EU, as it retains its currency and central bank and has access to the world’s largest single market. Our base case scenario is that it will continue to do so.”

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